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Local Comparative Advantage: Trade Costs and the Pattern of Trade

Author

Listed:
  • Alan V Deardorff

    (University of Michigan)

Abstract
When there are costs of trade, such as transport or other costs, the pattern of trade may not be well described by the usual measures of comparative advantage, which simply compare a country’s costs or autarky prices to those of the world. Instead, a better comparison takes into account the costs of trade. This paper shows first, in an example, how trade patterns can vary with costs of trade. It then provides restatements of the Law of Comparative Advantage, first in a Ricardian model with trade costs. It then extends a result from Deardorff (1980) and Dixit and Norman (1980) to include trade costs explicitly in a more general framework. It uses this result to derive two correlations that relate trade patterns to measures of comparative advantage that take account of both autarky prices and the costs of trade. Finally, it examines the solution to a trade model with product differentiation in order to make the potential role of trade costs more explicit, both algebraically and graphically. With product differentiation either by country or by firm, net trade in an industry, both bilaterally and globally, depends on a country’s costs of both production and trade relative to an index of those costs for other countries.

Suggested Citation

  • Alan V Deardorff, 2004. "Local Comparative Advantage: Trade Costs and the Pattern of Trade," Working Papers 500, Research Seminar in International Economics, University of Michigan.
    • Handle: RePEc:mie:wpaper:500
    as

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    File URL: http://fordschool.umich.edu/rsie/workingpapers/Papers476-500/r500.pdf
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    References listed on IDEAS

    as
    1. Alan V. Deardorff, 2011. "The General Validity of the Heckscher-Ohlin Theorem," World Scientific Book Chapters, in: Robert M Stern (ed.), Comparative Advantage, Growth, And The Gains From Trade And Globalization A Festschrift in Honor of Alan V Deardorff, chapter 11, pages 91-103, World Scientific Publishing Co. Pte. Ltd..
    2. Dixit, Avinash K & Stiglitz, Joseph E, 1977. "Monopolistic Competition and Optimum Product Diversity," American Economic Review, American Economic Association, vol. 67(3), pages 297-308, June.
    3. Alan V. Deardorff, 2011. "Determinants of Bilateral Trade: Does Gravity Work in a Neoclassical World?," World Scientific Book Chapters, in: Robert M Stern (ed.), Comparative Advantage, Growth, And The Gains From Trade And Globalization A Festschrift in Honor of Alan V Deardorff, chapter 24, pages 267-293, World Scientific Publishing Co. Pte. Ltd..
    4. Donald R. Davis & David E. Weinstein, 2001. "An Account of Global Factor Trade," American Economic Review, American Economic Association, vol. 91(5), pages 1423-1453, December.
    5. Alan V. Deardorff, 2011. "Trade and Welfare Implications of Networks," World Scientific Book Chapters, in: Robert M Stern (ed.), Comparative Advantage, Growth, And The Gains From Trade And Globalization A Festschrift in Honor of Alan V Deardorff, chapter 29, pages 347-369, World Scientific Publishing Co. Pte. Ltd..
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Comparative advantage; trade costs; transportation costs;
    All these keywords.

    JEL classification:

    • F11 - International Economics - - Trade - - - Neoclassical Models of Trade

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